Submitted by Eric Peters, as excerpted from his latest Weekend Notes.
“One thing’s gone right this year: Tech,” bellowed Biggie Too, Global Chief Investment Strategist for one of those Too Big to Fail affairs. “I get the rationale, but that don’t make me trust it.” Tech fund inflows are running at a $ 37bln annualized pace this year, 2x last year’s stunning rate and 10x higher than any year in the past 15.
“When tech gets sold, it won’t be because of tech, it’ll be something else,” barked Biggie, a big golden grin. The Nasdaq fell 33% in 1998, not because of tech, it was LTCM, Russia. “That’s how you play this game.”
“The ERM (exchange rate mechanism) worked for years. Europe’s economies were in rough balance, thus their currencies fluctuated in reasonably tight ranges,” said the CIO. “Then Germany united, sparking a domestic economic boom and inflationary surge that was asynchronous with the other ERM countries.” This divergence required a currency realignment that the ERM couldn’t accommodate, so it failed, spectacularly. “First Italy was blown out. Then the UK, Sweden, Finland. Germany spared France, which hiked rates and sparked a recession.”
“10yrs after 2008, the global economy had found a rough economic equilibrium,” continued the same CIO. “Then the US implemented this powerful fiscal stimulus.”
The move was so unorthodox that no other nation dared follow, nor should they. And this stimulus gives the Fed space to normalize rates, and it gives Trump room to play trade hard-ball, confident that the domestic economy will remain relatively robust.
“America is now out of sync with everyone, and we will see this rolling series of crises across the world, particularly in emerging markets.”
“We don’t build schools, colleges, houses, roads, railways or banks. Nor do we finance them. Those tools, rightly, are in the hands either of governments or private companies,” explained UK central banker Andy Haldane. You see, the Labour gov’t proposed a change to the Bank of England’s charter, setting a 3% target for productivity growth. Having spent decades abdicating their responsibilities to central banks, politicians have found voters are now demanding they do something. They have many choices, theories. What will they try?
“By achieving its statutory objectives of price and financial stability, the Bank of England provides one of the necessary foundations for productivity,” continued Andy Haldane, justifying the existence of central banks. What he did not say was that no one knows for sure whether price and financial stability are necessary foundations for rising productivity. So many of the world’s greatest companies came of age amidst market and economic upheaval. Should we be surprised that productivity has collapsed as central bank dominance peaked?
“Central banks do not have the tools to affect lasting change,” concluded Andy Haldane. As a statistician, he probably believes that. You see, a central bank can do only two things. It can pull demand and investment returns from the future to the present, or it can do the opposite. To trained statisticians, neither should matter in time. But playing with time and money is not something done in isolation – its manipulation impacts who becomes rich and poor, it distorts the process of creative destruction, and as we see today, it spurs political change.